Adam Smith's Lost Legacy

Friday, June 29, 2007

Thought For Friday: the pursuit of happiness by Adam Smith

Darrin M. McMahon, a professor of history at Florida State University, is the author of "Happiness: A History", writes here in Dallasnews.com, 28 June:

“Don't feel too bad about lusting after Apple's next product”

“Political economist Adam Smith was wiser about such things than today's scolds. He knew that "frivolous objects" could never secure our happiness, which was above all a matter of the soul. But he also knew that our longing for what he called "baubles" and "gewgaws" was a productive force that tapped deep into the wellsprings of human nature. It was natural, he thought, to aspire to such things, and natural for us to imagine that having them would bring us happiness.

Mr. Smith also understood that humans innately overestimate the amount of pleasure that gewgaws and iPhones would bring. And yet he thought that the impulse to acquire them was precisely the force that "rouses and keeps in continual motion the industry of mankind," prompting us to build cities, invent and improve the arts and sciences. The key to all human progress, Mr. Smith knew, was the pursuit of happiness.”

CommentDarrin M. McMahon is absolutely right, which is a pleasure to see at Lost Legacy.

Adam Smith covered this subject in Moral Sentiments (1759) when he linked ‘beauty’ to ‘utility’ (TMS IV.1.11: pp 179-87: the same chapter that mentions the metaphor of ‘an invisible hand’). The gist of which is that people desire objects not for their utility so much as for their ‘beauty’ in the purpose they are made for.

From this idea (which Smith considered to be original; though he acknowledges David Hume’s contribution), Smith attributes to an item the quality of it being more valued than the end for which it was designed.

In consequence people ‘ruin themselves by laying out money on trinkets of frivolous utility’. He goes on to recount the parable of the ‘poor man’s son, whom heaven in its anger has visited with ambition’ (p 181) and states clearly that the rich with their ‘numberless artificial and elegant contrivances for promoting their ease and pleasure’ are not really ‘happier than other people’, but poorer people imagine that ‘they possess more means of happiness’ (p 182). In their pursuit for what the richer people have (and what we would call today, 'keeping up with the Jones's next door'), they engage in activity to earn more to afford more.

It is this illusion that drives the economy and the ambition of all those who wish to ‘better themselves’ and it is ‘well that nature imposes upon us in the manner’ because ‘it is this deception which rouses and keeps in continual motions the industry of mankind’ (p 183).

It is the pursuit of happiness, and not necessarily its attainment that is the motive force of the commercial economy and whatever came or will come after it.

Two Sons of Kirkcaldy Compared

Brian Monteith, is a former conservative member of the Scottish Parliament. I forget why he left active politics, but he was always a lively thinker for his cause of the Right, and a different sort of Tory to many others I have met – he was actually interested in politics… not ranting, in the clash of ideas, not personalities, and I for one am sorry that he jumped off the ‘greasy pole’.

“I was reflecting on this (Britain’s new prime minister) as I flew back from Africa and killed the time by reading a new book by my friend Eamonn Butler. Adam Smith - A Primer is a succinct and accessible hundred pages that describes Smith's great contribution to the world.

Next year, Eamonn crowns his life's work of promoting Smith's teaching when the statue of the great man is unveiled on the Royal Mile. I've seen the model of the statue and I think it will become an instant hit. Typically, it has been paid for by private subscription. Forget Joe Public, Adam Smith represents the interest of the common man or woman.

Smith is sometimes portrayed as believing in materialism, greed and selfishness, but that is to misrepresent him. As Eamonn Butler reminds us, many of his sharpest criticisms were reserved for the rich and he firmly believed - and could show - that free markets benefited the poorest most. Smith's benevolence and humanity colour every page of An Inquiry into the Nature and Causes of the Wealth of Nations and, before that, The Theory of Moral Sentiments.

He lifts the welfare of the nation, and of the poor in particular, above the special interests of merchants, the mighty and the very wealthy who will seek to protect themselves from competition that will give others the chance to emulate them (or more likely their forefathers).”

CommentFirst, I declare an interest: Eamonn Butler’s ‘Adam Smith – a primer’ is a short book for which I wrote an Introduction at the invitation of the IEA.

Nevertheless, it comes with my strongest recommendation. It is published by Profile Books, London for the IEA (Institute of Economic Affairs), which you can purchase from: IEA 2 Lord North Street, London SW1P 3LB, price GBP7.50 ISBN978-0-255-366608-3 For clarity: I have no financial interest in the book whatsoever (I only have moral interest in its sucess).

Second, it is in my view ‘the best short introduction to [Adam Smith] in print that I know of, and it will enable anybody to know what Smith was truly about’.

Thirdly, ‘almost all the so-called diversions and detailed expositions supposedly making The Wealth of Nations to be ‘difficult’ and ‘irrelevant’ to modern readers arise from misunderstandings of what he was about. He was not a modern-style author of a ‘principles of economics’ text – the subject did not exist when Smith was alive. He wrote a report of his inquiry into the true meaning of wealth, what caused wealth to grow and society to progress towards opulence, and what held it back. His was the right book at the right time. That was his genius and his legacy. And Eamonn Butler’s presentation is your best opportunity to see why.’

Fourth, buy the book.

* The reference is to the fact that Adam Smith was born in Kirkcaldy and so was the new British Prime Minister, Gordon Brown. I think it might be fairer to say that Gordon Brown definitely wants to reduce poverty, especially in Africa, but whether he is going about it in the way that Adam Smith would have recommended is another matter.

I know nothing of this organisation. Whatever else it is accused of, over which I have an open mind (the affairs of the good citizens of Missouri being none of my business as I don’t live and vote there), the authors of the Adam Smith Foundation’s manifesto are grammatically challenged, even by the usual weary complaints of English speakers on this side of the Atlantic:

“The funniest thing is the “suggested readings” link has one book, Adam Smith’s Wealth of Nations. Now is it even plausible that folks who don’t have the sophistication to understand the difference between “principles” and “principals” will be expected to both read and understand Adam Smith’s epochal work on economics? I think you and I know the answer to that question, don’t we?”

To which I comment: I concur.

If it was only grammar that the epigones got wrong, we would have less to complain about, but they usually get Adam Smith's ideas completely wrong too. No danger of that here, because if they are illiterate to this extent, they are no danger to Smith's ideas because they probably wouldn't understand them.

Thursday, June 28, 2007

New Edition of Wealth Of Nations

A new edition of Adam Smith’s Wealth Of Nations has been published this week by Harriman House at the amazingly low price of GBP19.99.

The publicity leaflet I received today from the Adam Smith Institute, London, is extraordinary in that it captures the authentic essence of what Smith was doing when he wrote his classic. Let me quote from it:

“The Wealth Of Nations is a treasured classic of political economy. First published in March of 1776, Adam Smith wrote the book to influence a special audience – the British Parliament – and its arguments in the early spring of that year pressed for peace and cooperation with Britain’s colonies rather than war.

Smith’s message was that the economic exploitation, through the monopoly trade of empire, stifled wealth creation in both home and foreign lands. Moreover, protectionism preserved the status quo, and privileged a few elties at the expense of long run growth.

Smith wrote: ‘It is the industry which is carried on for the benefit of the rich and powerful that is principally encouraged by our mercantile system. That which is carried on for the benefit of the poor and indigent is too often either neglected or oppressed.’

CommentThat is an exactly correct summary of what Smith was about, unusual because most commentators, including Nobel Prize winning economists, often make problematical claims about Wealth Of Nations.

Smith did not write a textbook, though he is often judged as if he did (Schumpeter, et al.) He did not write about capitalism, or laissez-faire or the invisible hand of markets (as claimed by practically all neoclassical authors).

He wrote about the emerging commercial society from the 5th to the 18th century, that had been diverted from its natural growth trajectory into national states, jealousy of trade rivals, internal regulations, monopolies, colonies, wars and protectionism by governments and legislators following the fallacies of mercantile political economy, all of which conspired to channel wealth creation (the products of labour and land, or the production and exchange of the ‘necessaries, conveniences, and amusements of life’) into lopsided lower growth paths, and partly stifle progress towards opulence, especially for the ‘lower orders’.

I commend the authors of the publicity leaflet who got it right for this occasion. May readers get it right too.

The quotation, by the way, comes from Wealth Of Nations, Book IV.viii.4: p 644)

Good Sense on Adam Smith from Auckland, New Zealand

“Speaking of Adam Smith, and his classic title The Wealth of Nations, like loads of others I have had him quoted left right and centre as being the father of small government and modern shareholder capitalism.

Funny old world - you and I know this is simplistic twaddle; that, in contrast, he was really clear that the purpose of the modern enterprise is to give the consumer [as opposed to the shareholder] the best deal possible.Also, he was equally clear that there was vital role for government around education, and building civic space.”

CommentYes, much written about Adam Smith by economists in the media is ‘simplistic twaddle’. For example, Smith was not the “father of small government and modern shareholder capitalism”. His objection to 18th century government was not that they did ‘too much’, but that they followed the wrong policies, which he fully described and analysed as ‘Mercantile political economy’.

His own proposals for appropriate actions by government were extensive by 18th century standards: defence, justice, education, health, post offices and the mint, quality marks on products, town cleanliness, street paving, and ensuring that the populace had access to sufficient products of land and labour (Wealth Of Nations, Book V).

But overall, McGovern Online understands what Smith was really about, for which I would give him 10/10.

Wednesday, June 27, 2007

'Mind of God' Conundrum for Invisible Hand Explanations

Britannica Blog: ‘where ideas matter’ (‘Britannica Blog is a place for smart, lively conversations about a broad range of topics. Art, science, history, current events – it’s all grist for the mill. We’ve given our writers encouragement and a lot of freedom, so the opinions here are theirs, not the company’s. Please jump in and add your own thoughts.’)

Thomas Mann, a reference librarian and the author of The Oxford Guide to Library Research (Oxford, 2005), writes: 27 June:

“Invisible hands” produced by “collective wisdom” in information science, however, may quite possibly lead to problems comparable to those created by the “invisible hand” of Adam Smith’s capitalism, whose operations were found to require major corrections by laws regulating hours of work, minimum wages, job-safety considerations, pollution levels, etc.; by unions closely monitoring actual day-to-day work conditions; and by enforceable codes of ethics in stock markets. History would seem to indicate that unregulated “invisible hands,” when left to themselves, always wind up holding mirrors that reflect our own non-re-engineered human nature, good and bad, rather than our utopian ideals. (We might well ask: if the “mind of God” is emerging from the collective intelligence displayed by the Web, why is it that the deity is so preoccupied with gambling, pornography, hook-ups, plagiarism, piracy of intellectual property, and Viagra knock-offs?).”

CommentOf course, the big question hides behind the magnificent ‘If’ parenthetical tail-end sentence, about the ‘mind of God’ assertion, to which on this occasion I would add: ‘why indeed?’

Adam Smith is absolved from the ‘invisible hand’ in ‘capitalism’ because he never said anything about ‘capitalism’, a word and a phenomenon unknown to him. The word first appeared in English in 1854 because it was a mid-19th century phenomenon, associated with large-scale markets and power-driven machinery, in which capital substituted for labour to boost the division of labour and the sub-division of enterprise activities in ever widening specialisation.

If information science has adopted invisible hand explanations, I am not surprised that Thomas Mann has questions about it. Invisible-hand explanations grew out of general equilibrium economics in mid-20th century discourse among neoclassical economists. The words used by Adam Smith, two hundred years earlier (and by literary writers right back to classical times), were metaphors, used only three times in the million words he wrote, and on each occasion the metaphor had nothing to do with markets (see my paper: ‘Adam Smith’s Invisible Hand: from metaphor to myth’: for a copy email me at: gavin{At}negweb{(dot)]com), or the 'mind of God'.

If an invisible hand needs to be regulated, it cannot have anything to do with the ‘mind of God’; and if it has nothing to do with the ‘mind of God’, it clearly does not exist (as if it ever did in the form it is presented today).

Tuesday, June 26, 2007

Is It a Generational Problem?

Duncan Stephen, a 21-year-old from Kirkcaldy, Fife (UK), currently studying Economics and Politics at Edinburgh University, is absolutely correct in his interpretation of the selfish charge often made against Adam Smith specifically and the exchange transaction known as ‘bargaining’ (usually complete with the ‘butcher, brewer, and baker, quotation from WealthOf Nations).

“In Adam Smith’s world, the bread maker gets what he wants by thinking about what his customer wants. In return, the customer gets what he wants by thinking about what the bread maker wants.

While the bread maker’s ultimate goal — to make money — is selfish (as is the customer’s), neither party gets anywhere without considering the other. The baker knows that he can make more money by pleasing his customers, so he has to think about what his customers want. By the same token, the customer will not get his bread unless he thinks about what the bread maker wants.

So in this system you cannot get what you want if you are selfish. This sounds like a paradox. But the fact that you can only get what you want by taking into account what others want is part of the genius of the market system.

The above transaction involving the bread maker is obviously an extremely simple example which doesn’t look too impressive on its own. But most people go through several such situations every day. I am sure both Adam Smith and Friedrich Hayek saw markets as an intertwining network of social interaction. In such a system, you cannot possibly be an individualist! You cannot trade with yourself, can you?”

CommentThis is a correct presentation of Adam Smith’s views from Book I, chapter ii of Wealth Of Nations. Would that those epigones who quote this famous, because much quoted, and as often misinterpreted, passage read what they quote a little slower and with more attention.

If Duncan Stephen can get it right from the start of his studies, why can’t those faculty profs get it right too? Economics will be in safer hands if Duncan is representative of the new students in the ‘next generation’ as ASI calls them, than it ever was with the (many) profs who got it wrong.

Mischievous MisQuotations Do Not a Case Make

Ten Thousand Days, a Blog by C. J. Stone with the catch sub-heading: “Ten thousand days, that's exactly 366 lunar months, or just over 27 years. It's how long I have left to live, if I'm lucky that is. Just to remind me that every day counts. Updated every Sunday”. Already at 43, the author is counting the months to the proverbial 'three-score and ten'.

“Adam Smith is famous for having extolled the virtues of the free market.He is supposedly Gordon Brown’s favourite writer, hence – probably – his appearance on our English £20 note, despite the fact that he was Scottish”.

CommentThe Bank of England was founded in 1694 by William Patterson, a prominent and wealthy Scotsman living in London. It is the central bank of the United Kingdom of Great Britain and Northern Ireland and as such its bank notes are legal tender throughout the UK, and not just England. Unfortunately, this is not the only slip of ignorance by its author and much worse follows.

C. J. Stone continues:

“In other words, the so-called free market is based around the need of producers to accrue wealth, not the need of consumers to get a fair deal.

This is still the case. There is still no such thing as the free market. It is a system entirely rigged to serve the interests of certain groups with wealth enough to buy influence over government.

“It cannot be very difficult to determine who have been the contrivers of this whole [mercantile] system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to [; and among this latter class our merchants and manufacturers have been by far the principle architects” (WN IV.viii.54: p 661)]

CommentC. J. Stone is economical with the truth. He has doctored Smith’s quotation by dropping the key word ‘mercantile’ (placed in square brackets by me) and he dropped the last part of the sentence (restored by me in square brackets), and gave no references for where in Wealth Of Nations it resides. C. J. Stone may not know the full quotation – he may have got it from a book of quotations that slips in political messages for the unwary – but in this case, the context is most important.

Smith’s Book IV in Wealth Of Nations is a polemic against ‘mercantile political economy’, which was the commercial system dominating the British economy, before 1707 applying separately to Scotland and England; after 1707 to both countries together. This was not the commercial system that Smith advocated.

Mercantile governments favoured policies that aimed to strengthen the power of the state, to accumulate gold and silver bullion, and perhaps more important, to fund colonies in America over which monopolistic powers could be enforced so that they exchanged their produce exclusively for manufactured goods from Britain, and excluded all other countries. It was these mercantile policies that were ‘contrived’ by ‘producers’ (i.e., those merchants and manufacturers who gained from the monopolies), to which the antidote was competition from the freedom of Britain and the American colonies to trade with whomsoever they wished. It was most decidedly not a charge laid against commerce and it is disingenuous of C. J. Stone to imply that it was, or that it holds sway today in relatively, but by no means exclusively, competitive economies.

C. J. Stone continues:

“In other words, the so-called free market is based around the need of producers to accrue wealth, not the need of consumers to get a fair deal.

This is still the case. There is still no such thing as the free market. It is a system entirely rigged to serve the interests of certain groups with wealth enough to buy influence over government.”

CommentC. J. Stone, if he reads Wealth Of Nations, would learn that ‘wealth’ is not mere money, which is one of the mercantile fallacies that Smith criticises. Wealth to Smith is the annual output of the products of ‘land and labour’, ‘the necessities, conveniences, and amusements of life’. Producers (even monopolists) can only accrue their revenues by providing consumers with the ‘necessities, conveniences, and amusements of life’. Smith writes, close to where C. J. Stone misquotes him (he only needs to turn back one page – if he had quoted direct from Wealth Of Nations?):

‘Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer’ (WN IV.viii.49: p 660). If he believes that the ‘system is entirely rigged’ for other purposes, he has identified a political problem, and the advocates of free-trade competition will, no doubt, to have C. J. Stone join their ranks.

In case C. J. Stone has another solution to the problem of ‘rigged’ markets, such a socialist administration of the economy, I simply refer him to the experience of having states run the economy. Whatever their intentions, and I have no evidence, historically or current, that suggest such socialist planners are any different or more competent than the dispersed administrators of capitalist firms, the empirical results show the consumers get a worse deal under socialist planners than even the most incompetent or corrupted capitalist economy.

When some Polish people visited Australia after the fall of Communism, they were reported to have visited a supermarket store in a Sydney suburb and to have wept at the rows of packed shelves with goods for sale in contrast to shops in Warsaw where meat was rationed, most shelves were empty, and the staff was surly, etc.

C. J. Stone continues:

‘Or, to quote Adam Smith again: “The vile maxim of the masters of mankind, all for ourselves and none for other people.” ’

CommentC. J. Stone rewrites the quotation once again because the actual quotation as written by Adam Smith states:

‘All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind’ (WN III.iv.10: p 418).

If context mattered to C. J. Stone, he would know that Smith in this passage is commenting on the way in which Feudal Lords unintentionally let go of their absolute local power (after near on a thousand years of domestic warfare, rapine, serfdom and slavery across Western Europe, following the fall of Rome in the 5th century) by the slow and gradual appearance of commerce from around the 15th century that induced them to exchange their awesome power of tyranny over people for ‘diamond buckles perhaps, or something and frivolous and useless’, resulting in their giving up their armed ‘retainers’, and their lands too to satisfy their petty greed.

This happy outcome was brought about, write Smith, by ‘the silent and insensible operation of foreign commerce and manufacturer’ (WN: Ibid). I would have thought this was something that C. J. Stone would have applauded instead of misquoting Smith; but where ‘ignorance predominates, vulgarity asserts itself’ (or so I was taught at school).

Some Conservatives and Mercantile Political Economy

During any week I receive many emails from various politically-minded groups picking on current news stories and using them to present their arguments for this or that (left, right and religious) solution. It was from some of these that I realised that plain Libertarians are joined by Left and Right Libertarians (imagine trying to keep neighbouring communities of these two apart without a 'Libertarian' war!), anarcho-socialist, anarcho-communists, anarcho-capitalists and plain anarachoists.

One such newsletter is from a conservative group and in today’s posting it contains this paragraph from before the article (nice to know some readers question two of its main obsessions):

“I know that some of you may disagree with this assessment on outsourcing and free trade. But mind you, the authentic conservative position is to oppose free trade and outsourcing. Russell Kirk and Richard M. Weaver, "the fathers of American conservatism," were both extremely skeptical of global capitalism and both opposed free trade and outsourcing. Unfortunately, many in the GOP have been "neoconned" into supporting free trade and outsourcing.” (Conservative News, 26 June 07 – no url, except ‘no reply’, so I cannot say where it comes from.)

CommentIf Russell Kirk and Richard M. Weaver inspire Conservative News, I have some news for them too.

For Conservatives to be ‘skeptical of global capitalism and both opposed free trade and outsourcing’ they would be modern representatives of Mercantile political economy, a doctrine and practice built out of the end of feudalism and its replacement by monarchist nation states in the 17th – 18th centuries, against which Adam Smith wrote Wealth Of Nations.

Wealth Of Nations was not a textbook on economics, as we are familiar with today. It was a detailed critique of the doctrine that the sovereign rules over a territory in which domestic agriculture fed its populace, and which exported more goods than it imported, and accumulated gold and silver bullion to enable the King to defend his territory against land invasions and sea power, and used bounties on exports and protective tariffs and outright prohibitions on foreign goods to ensure this outcome. These regimes were (and to a large extent still are) characterised by jealousy of trade, colonial monopolies and a proclivity for wars, often over trivial 'princely' ends.

If Republican Party representatives support ‘free trade and outsourcing’ that is a step forward, bearing in mind that Smith was sceptical that free trade would ever be restored in Britain (he called it a belief in ‘utopia’: WN IV.ii.43: p 471), and judging by events since 1776, we can see what he meant. If Conservative News wants to return to the mercantile political economy as a deliberate state policy, then we all could have something to be concerned about if the electorate voted for such a mutually impoverishing policy.

Monday, June 25, 2007

More Confusion from the Geographically Challenged

Bill McKibbens in his Blog, More Deliberate Every DayWrites a ‘Third Post’ on 23 June in a mini-series he is running called ‘Deep Economy’, in which this gem appears:

“. . . Adam Smith, watching the butchers and bakers of his English village making each other richer through the invisible hand of economic exchange, never imagined that the skids would be so thoroughly greased.”

CommentApparently ‘Deep Economy’ is not researched ‘deep’ enough, which is odd, given that it is written with all the certainties of someone claiming to know what he is talking about.

Memo to Bill McKibbens: Adam Smith was Scottish not English. He wrote Wealth Of Nations between 1762 and 1773 in France and Scotland, not England (except, possibly for some ‘up-to-date’ notes in Book IV to accommodate comments on the 1776 rebellion in the British colonies of America).

He did not have an English village which he could call ‘his’ own.

Whatever else the benefits of the exchanges between the ‘butchers and bakers’ and their customers (er, what happened to the Brewers?) they didn’t get ‘richer through the invisible hand of economic exchange’ (whatever that means).

The first three chapters discussing the customer's exchange with the ‘butchers, brewers, and bakers’ were definitely written sometime before these lectures were given in 1762-3 in the University of Glasgow (Scotland!), according to notes published by anonymous students in Lectures in Jurisprudence ([1762-4], 1977, Oxford University Press and Liberty Fund, Indiana).

If anywhere, the imaginary ‘village’ was in Kirkcaldy, Fife, Scotland and nowhere near England.

Those confusing Scotland with England are clearly geographically challenged.

When Narrow Minded Guilds Ensure Zero Sum or Worse, Negative Sum

“The video may complicate the prospects for immigration reform this year. While most of the debate has been over what to do about low-skilled workers, including the 12 million illegal immigrants already in the U.S., the policies for high-skilled workers are now becoming controversial, too. Microsoft (MSFT), Intel (INTC), Google (GOOG), Oracle (ORCL), Motorola (MOT), and a host of other leading technology companies have called for new policies to make it easier for skilled workers to come into the U.S., including by making available more H-1B visas…..

….. Then Kim Berry, president of the Programmers Guild, an advocacy group for U.S. tech workers, took excerpts of the footage, edited them into a five-minute clip, and posted it on YouTube. The video has received tens of thousands of views so far...…. Employers don't have to prove that they can't hire Americans to employ an H-1B visa worker. But if they want to sponsor that worker for permanent residency, then they need to take a series of steps to prove no U.S. worker is qualified, including placing ads in newspapers, reviewing résumés, and interviewing potential candidates…

What surprises me [George Borjas] is how naive people can be. Did anybody really expect employers not "to circumvent those rules"? Maybe it's time for some classic Adam Smith:

‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’ ”

CommentThe quotation from Adam Smith is from Wealth Of Nations (I.x.c.27: p 145), and is apposite to aspects of the reports from George Borjas, Robert W. Scrivner Professor of Economics and Social Policy. Contact information:. Kennedy School of Government, Harvard University (i.e., a ‘heavy hitter’).

Take care when apply this (famous) quotation to modern circumstances. It does not only apply to employers and corporations, though most people using it think it does. Smith was referring to the behaviour of towns run by ‘trades’, which were in fact individual tradesmen and artisans, who under law (originally introduced to encourage ‘industry’ in the 16th century) had the exclusive power to manage the trades within them.

Naturally, being human, the original good intention was subverted by the incorporated trades to create monopolies, to restrict competition from non-incorporated tradesmen (i.e., those specialised workers who had not served a seven-year apprenticeship with a tradesman in the same town).

A famous victim of this policy to protect industry in a town (on quality and public safety grounds) was James Watt, who though a talented instrument maker was denied permission by the Glasgow Incorporated Trades to practise his trade there. If he had not been ‘rescued’ from unemployment by the senate of the University of Glasgow, exempted from the supervision of the Glasgow Incorporated Trades as a centre of learning, which appointed James Watt as the university’s instrument maker, he might never have been handed the university’s model Newcomen engine to repair in 1763 and then ‘improve’ after 5 years experimentation. Of course, that may have meant that the advanced Watt-Boulton steam engine would not have happened, and the process that led to power- driven machinery would have been delayed, perhaps by decades.

The then ‘modern’ monopoly measures of the Incorporated trades in towns across Britian were condemned by Smith, as in the quotation. Most of the early factories of the growth of industry were either new products or were made outside the boundaries of the ancient towns existing in the 16th century.

Looking at the report of the debates over immigration in George Borjaj’s article he mentions ‘Microsoft (MSFT), Intel (INTC), Google (GOOG), Oracle (ORCL), Motorola (MOT), and a host of other leading technology companies’ that have ‘called for new policies to make it easier for skilled workers to come into the U.S., including by making available more H-1B visas..’. So the ‘usual suspects’ are paraded and the gist of the complaints are that employers are fiddling the H-1B visas, which for some strange reason is judged to be against US interests (a nation of immigrants themselves!).

He also reports ‘Kim Berry, president of the Programmers Guild, an advocacy group for U.S. tech workers’, who posted excerpts from a video on Youtube, which has stirred up trouble for employers (what happened to international solidarity among labour interests?). Apparently, the system requires that employers wanting to recruit permanent workers ‘need to take a series of steps to prove no U.S. worker is qualified, including placing ads in newspapers, reviewing résumés, and interviewing potential candidates’. Here the interests of the Programmers Guild and those of immigrant skilled workers are in conflict.

Why do employer shave to go to the legislated trouble to employ people able and willing to work in industries crucial to the long term prosperity of the USA? Do the authors of these obstructions to employment realise what they are doing? Are they happy to be part of the hostility to foreign imports of low tech products from China, and sooner rather than later, high tech products where at present the US has the lead, but without additional supplies of high-tech capable workers it will not be for long?

Smith’s hostility to the behaviour of Incorporated Trades in the 18th century was directed at individual tradesmen given monopoly powers in the towns. These are the 18th century equivalent of the 21st century Programmers’ Guild (how aptly they name themselves!); not capitalist corporations, but trades unions (and Guilds) whose members oppose immigration because it widens the competition for work.

Their predecessors in Glasgow almost single-handedly delayed the process that led to the industrialisation of the world, which didn’t matter so much in the 1760s because no country was remotely close to Britain in being industrialised, and a few decades delay made no difference. The members of the Programmers Guild should look out of their windows. Today the USA is among scores of countries that are industrialised and capable of doing what USA Guilds prefer not to do. There are millions of Chinese, Indian, other Asian educated workers willing to travel across their countries and continents to work in Hi-Tech trades, plus the Europeans and, of course, fellow NAFTA countries.

Incidentally, Adam Smith was a member of the Senate at Glasgow University that responded to plight of the talented James Watt and which offered him a post in the University, with rooms to work in, and work to do.

From such incidents momentous changes become possible. Change in commercial societies is seldom zero sum, though the antics of the Guild trade unionists (ancient and current) and narrow minded employers, plus bigots and demagogues never find it difficult to make everything they influence zero sum, or worse, negative sum.

How Not to Fight Ignorance With Mythical Illusions

Dan Roberts, Business Editor, Sunday Telegraph, was bewailing the sloppy PR of the private equity sector that is ruffling the feathers of the Old Left in Labour, the bruiser corporate trade union giants and some Glastonbury music fans(?).

He writes under the heading: ‘These masters don't understand their universe’, and gives them advice about how they might handle more effectively the noise from the aforementioned people. On the advice he gives, I have little to say (the are well enough off, apparently, not to need my scribblings on how they might improve their act from me).

I did spot the tail-end paragraph that drags in Adam Smith on the usual misrepresented grounds:

“Perhaps it was too much to expect an “Adam Smith-style treatise on the invisible hand. In the face of such overwhelming confusion over the detail, perhaps they decided it would be folly to start arguing about the big picture. But no matter how teeth-grindingly annoying it is, the private equity industry has to start engaging with its critics rather than swatting them off.”

CommentIf ‘an Adam Smith-style treatise on the invisible hand” is the supposed remedy in PR terms, or even just one that is considered to be rejected for something in its place, I hold out little hope for the private equity PR effort to do more that make things worse for them.

I have absolutely no idea what an “Adam Smith-style treatise on the invisible hand” would read like. It certainly wouldn’t be a very long one, perhaps a sentence. It wasn’t longer in its original version by Adam Smith, where it was a mere metaphor for risk aversion among a group of merchants unwilling to risk their capital in foreign trade, which is not exactly what private equity funds do today.

What Smith’s use of a well-known metaphor (well known in the mid-18th century from the use of the metaphor in literature before his casual employment of it in a context that other nothing to do with markets) would do for the PR activities of private equity funds would be a wonder to behold.

I would have thought (my initial 2 cents/pennies' worth) that a PR campaign centring on a metaphor with allusions to a mystical, diembodied, non-existent entity would hardly be a bright response to the illusions of their PR targets. But there you go; what do I know.

Any reqader who would like to see my paper: “Adam Smith’s Invisible Hand: from metaphor to myth” (presented at the History of Economics Society’s 34th Annual Conference, June 2007, George Mason University) should email me: gavin At negweb{Dot]com and I shall send an electronic copy.

Sunday, June 24, 2007

A Blow Against Adam Smith's Epigones

It’s wonderful to see an oft-urged comment on people who misquote Adam Smith being advanced by prestigious economist Blog authors such as Tim Worstall,when as often other Bloggers simply repeat the myth of Adam Smith and his so-called ‘invisible hand’.

I’ll risk being discourteous to Tim’s copyrights and quote his piece in full:

“Dan Roberts on Adam SmithDan, old boy, yes, we know what you mean, but:Perhaps it was too much to expect an Adam Smith-style treatise on the invisible hand.Adam Smith didn't invent the phrase, he only used it three times in the one million words of his that we have and he most certainly didn't popularize it.In fact, and Adam Smith style treatise on the subject would mention it once every 330,000 words, roughly speaking, if we were to equate that length to a modern book, once every four books.Not quite what you meant really, is it?”

CommentNow if only all economists who offer Blog comments would do the same, we could get on with other important tasks in defence of Smith’s legacy, such as elaborating on his ‘model’ of growth in disequilibrium, his so-called labour theory of value, the real importance of his critique of mercantile political economy, his estimate of the important, but not overwhelming, role of government in a competitive economy, the real nature of self-interest, the role of the impartial spectator in social cohesion, his so-called religious beliefs and the form and consequence of competitive exchange, and much else.

So, well done Tim; you have struck a blow for Smith’s legacy and against the epigones. Thank you.

Saturday, June 23, 2007

Apologies for Another Interruption to Normal Service

Yes, I am on the move again, this time from France to Scotland, with prospects of a seven-week stay before returning to France for six weeks. The occasion is family-domestic: a child is about to be born and its grandparents (er, me and my wife, or more honestly, my wife and I) are to be on hand to help with the usual post-birth assistance as the new baby is settled into its parents home and their life-work balance (‘its’ is used here because boy or girl is not known just yet, by choice of the parents).

All being well, I may be re-connected this evening, though that depends on how much snail mail awaits me from my absence and what other household chores require my attention.

My book on Adam Smith (reeling from various disruptions while in France and my visit to GMU, Virginia) is in sight of the finishing line, though now so close to the deadline as to keep me awake at night, and whilest I am reviewing certain chapters (currently ‘10a' on Smithian Growth), I am passing through others fairly satisfied with their content.

All authors will know the terrors of the last reading –‘did I miss something?; ‘Is that reference right?’ ‘is that statement justified?’; and so on, with each trip to the Library finding another article popping up, challenging this or that approach, with the usual dilemma: ‘shall I insert something to accept/rebut the paper?’

I rest assured somewhat with the thought that it is ‘better to be approximately right than absolutely wrong’ (I hope). Perhaps it’s best to think of one’s book as ‘work in progress’ (?), but then, that is not what readers are paying for or what editors accept.

Friday, June 22, 2007

A Question of Smithian Values

A flurry in the Scottish media about a Georgian Mansion in Dumfries being put on the market with its contents intact that was designed by Scotland’s foremost 18th century architects, the Adam family firm (please, no jokes).

Duncan Macmillan, a Scottish journalist writes: “Are we willing to save our heritage?” in The Scotsman (21 June) and I quote a representative paragraph:

“Finally, if Scotland deserves a place in the modern world, it is above all because of what our ancestors in the Enlightenment did to shape it. Robert Adam and the Adam firm were part of that. The family was from Kirkcaldy, as was Adam Smith. Their use of the division of labour may have inspired his work in The Wealth of Nations. Before that however, Smith's first major book, The Theory of Moral Sentiments, was published the year Dumfries House was started. In the book, Smith presents the central values of the Enlightenment - above all, the importance of sociability and the belief that civilised society is built on the gifts of human nature, imagination and sympathy. Because Dumfries House and its contents are intact, we can still see they stand for those same things. They make them visible.

At a time when the values of the Enlightenment by which we have tried to live since that time are under savage attack, the Executive must stand by them. If it backs away from this, it will be judged wanting. It will be seen to have failed to understand what Scotland has given to the world. Not a good start for a nationalist administration.”

CommentThe asking price is £22 million, most of it for the furniture, curtains and paintings, most of original vintage.

Duncan Macmillan manages to hit all targets in his plea (sign of a good persuader):

Scotland in the modern world because of the Enlightenment; Robert Adam and family, major architectural influencers in Scotland and England associated with magnificent Georgian public buildings, many still in daily use; Adam Smith and his two books, Moral Sentiments (1759) and Wealth Of Nations (1776); the house and its contents as visible representations of the Enlightenment; its ‘values’ are ‘under savage(?) attack’ (it ‘twas ever thus’); the new Scottish Executive will be ‘judged wanting’ unless it ‘stands by’ these values; it will have ‘failed to understand’ Scotland’s many gifts ‘to the world’; and it would be a poor start for the ‘nationalist administration’.

Excuse me, but I defer to nobody for examples of commitment to Scotland’s heritage and defence of the values of the Scottish Enlightenment, but pressing a series of buttons does not a case make for £22 million on a building and contents that have rested safely in Dumfries House since 1759.

How does Duncan know that a new owner would simply disperse the contents, ‘knock’ the building down, or whatever? What exactly would be lost if the new owner did just that (assuming the planning laws let them)? The artefacts would be spread round the world and would be equally safe as when they rested in Dumfries. Is it our role to preserve Scotland in aspic forever?

The social work department, presumably for the benefit of people living today in Edinburgh, uses Adam Smith’s house, which he rented in Edinburgh in Panmure Close, off the High Street, and which today is owned by the City Council. I am sure he would have approved of such a venture; I am not sure that he would have approved if it had become a sort of shrine. What sort of Enlightenment value would that portray?

The statue of Adam Smith, about to be erected in Edinburgh High Street by private subscription (organised by the Adam Smith Institute, London), not public money, is close to the boundary of his modest sense of frugal taste.

He criticised his friend, David Hume, for arranging for, in Smith's opinion, an overly ornate Mausoleum over his grave on Carlton Hill, and he arranged a far simpler, frugal and modest one for himself. That was his style. Whether he would have approved of £22 million of public money, raised by taxation and not by productive activity, for an Adam House and its contents, is quite another matter.

Thursday, June 21, 2007

Smith Would Have Called it a Brief Digression

I have not compiled any Blog material today, though I have some incidents to hand.

This morning I started closely examining a paper on aspects of Smith by a colleague and it took eleven hours, for my comments to be noted and transferred to a message to the author.

In one sense it was hard work as I was checking references and searching for quotations; in another it was enjoyabe to read a fellow scholar at work on aspects of Smith's life and work, covering ground I have not seen covered elsewhere.

Anyway, I am back to my 'Smith book'tomorrow - re-examining his growth theory and trying to 'rescue' it from neoclassical interpretations that dominate at present. Smith wrote about disequilibrium not equilibrium, etc.

Wednesday, June 20, 2007

ASI taxes Brown on taxes

Madsen Pirie is the President of the Adam Smith Institute, the London think tank known for its broadly Smithian approach to policy measures that would raise the performance of UK business and improve the effectiveness of the social programmes of the public sector.

The ASI is often demonised as a ‘rightwing’ body by ‘leftward’ leaning media and politicians, and numerous NGO personnel, who gain attention for their own policy prescriptions, many of which caused the problems that ASI suggests, always politely, are capable of sensible remedies for the benefit of all.

ASI studies an issue, consults and thinks about it, and makes workable suggestions for getting from ‘here’ to ‘there’, always without rancour, never with abuse, and generally without too-high expectations that what they recommend will be adopted rapidly. It takes a Smithian ‘long view’ and never fails to remember that the humans on the chessboard of life are not wooden pieces that can be moved about by the dictates of government, or the rabid exhortations of charismatic would-be ‘leaders’.

In sum, ASI is an authoritative source of workable ideas, sometimes just a few small steps ahead of where decision-makers are ready to go, and interestingly, and to their quiet (not smug) satisfaction, where decision-makers often end up going, and for which they (the decision-makers) earn the credit. ASI is not in the business of loudly claiming credit; it is happy that the sensible changes have been adopted and that the decision-makers bask in public acclamation for their, often courageous, actions.

Madsen Pirie is in the Daily Telegraph (London) today with an article, ‘Brown failed to follow a fellow Scot's lead’, with Brown being Gordon Brown, Chancellor of the Exchequer for a few more days, before his anointment as Prime Minister, and the ‘fellow Scot’ being Adam Smith, and the subject that of Adam Smith’s ‘maxims’ (never canons!) of taxation from Wealth Of Nations (WN.V.ii.b.3-6: pp 825-26).

I would recommend this article to every reader because it captures the ASI method of sound ideas presented in readable format that carry within them a clear and workable change in approach that in time would radically alter the economic dynamism of the UK (or any other) economy.

Dr Pirie’s proposals with appropriate concern for the lower paid (and unpaid) segments of society (relieving them of the burden of income tax and the greater burdens of society not creating work and wealth for them because of distortions elsewhere in the economy), and with appropriate concerns to reduce the burdens of taxation on creating wealth, which is a necessary component of any policy to allow people to enjoy benefits of economic growth.

It is a programme to get from the ‘here and now’ with its massive taxation burdens, affecting all segments, all sections and all possible sources of ‘stealth taxes’, its massive complexities (9,973 pages and counting), its massive administrative burdens (£5.1 billion, but who’s counting?), and its massive distortions to the proper working of the economy, to where we want to go.

Dr Pirie proposes workable step changes in the taxation ‘system’, possibly taking two or three annual budgets, perhaps more. He favours, eventually, a serious consideration of a ‘flat tax’ (as I do), but characteristically, does not demand that leap just now. ASI is not in the business of demanding changes that have not chance of being implemented in real time. It prefers to persuade, a step of two at a time, and to allow the positive results to speak for themselves (and, if something does not work in practice, it accepts the outcome graciously – and suggests a different route).

If you want to see Smithian reforms in the process of becoming available for consideration by politicians, aspirants to Office, and to influencers everywhere, read it here.

Monday, June 18, 2007

David Warsh Is Unusually Problematic

One of my personal highlights at the History of Economics Society conference, at George Mason University 8-12 June, was to meet with David Warsh, retired top-flight US journalist and knowledgeable voyeur-extraordinaire of the people in economics and their ideas, and he Blogs at Economic Principals.

David was headline speaker at a plenary event and a very good one too. He was also a discussant at a session I attended earlier on 9th June, when Professor Emeritus, Warren Samuels, Michigan State University, spoke on the ‘Use of the Concept of the Invisible Hand and the Function it Serves’. I shall come back to Professor Samuel’s paper.

Today, I visited Economics Principals and found an article by David on ‘The Daily Diary of the Impartial Spectator Weighs a Buy-out’ about the proposed Murdoch take-over of the Wall Street Journal, about which I have no data.

In the article I found the following:

“In 1759, [Adam Smith] laid out a complicated moral philosophy based on what he asserted was the nearly universal human capacity for feeling sympathy for others. "How selfish soever man may be supposed," stated the first sentence of The Theory of Moral Sentiments, "there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it." But it wasn't do-good altruism, as opposed to self-interest, that made things work. Beneficence, wrote Smith, is the ornament, not the foundation of human affairs. "Justice...is the main pillar that upholds the whole edifice." The book earned him a university professorship.’

CommentJournalists are sticklers for facts and armies of ‘fact checkers’ fall over themselves checking their facts before publication. Smith wrote Moral Sentiments sometime between 1753-59. It was published in 1759.

Outstanding as Moral Sentiments was as a book, it played no part in his election to either professorial post, given that he was elected to the Chair of Logic at Glasgow University in January 1751, and moved to the Chair of Moral Philosophy in April 1752, five years before his book was published.

He may have included some aspects of Moral Sentiments in his earlier Edinburgh Lectures (1748-51), but beyond a smattering of ideas from Francis Hutcheson it seems unlikely that the intensely developed ideas in Moral Sentiments were in an impressive format so early. Certainly there is no extant documentation or letters to suggest differently. University Senates, then and today, are seldom impressed with promised dissertations by aspirant academics.

David continues:

“Sixteen years later, though, Smith published An Inquiry into the Nature and Causes of the Wealth of Nations and that was the book which made him famous. It also turned him from a moral philosopher into an economist. This time Smith employed another metaphor, the Invisible Hand, to describe the spontaneous order that interdependent markets tend produce: a pattern of coordination that looks as though it must have produced by some the design of some individual or group, but that instead arises from a process that can't be described as having had the outcome "in mind." Today we call this mechanism the "price system." David Ricardo and the next generation began the intricate work of excavating and refining Smith's intuition into the modern high-tech concept of "general equilibrium," meaning a pervasive interdependence produced by the tendency of factors to move from low rates of return to high, forever tending to counterbalance.”

CommentWith all my genuine respect for David’s knowledge of the history of economics, I find this a particularly striking set of assertions to which I reluctantly attach the label of ‘highly problematic’. I discussed the invisible hand in my paper to the HES conference, “Adam Smith’s invisible hand: from metaphor to myth”, and I think I thoroughly discredited the attributions that David (and many, too many, US trained economists) award to this particular metaphor.

David asserts that Smith used the invisible hand “to describe the spontaneous order that interdependent markets tend produce: a pattern of coordination that looks as though it must have produced by some the design of some individual or group, but that instead arises from a process that can't be described as having had the outcome ‘in mind’."

I shall not rehearse again the evidence of Smith’s use of the metaphor (only once in Moral Sentiments and once on Wealth Of Nations), but I can state with conviction that on both occasions his use of it had nothing to do with ‘interdependent markets’. (His reference to ‘the invisible hand of Jupiter’ in his essay, known as the ‘History of Astronomy’, c. 1744-54, is about religious superstition.)

I shall further assert that ‘Ricardo and the next generation’ may have done quite a lot of things, but they most certainly did not ‘refine Smith’s intuition’ about the metaphor of the invisible hand, which ‘today we call this mechanism the ‘price system’." The metaphor and the ‘price system’ were in quite different parts of Wealth Of Nations (and its prior use in Moral Sentiments was about feudal lords maintianing their serfs and retainers at least at subsistence level). Smith’s price system is discussed in Books I and II of Wealth Of Nations and the metaphor of ‘an invisible hand’ appears in Book IV, during his critique of mercantile political economy. It is nothing more than a metaphor of the ‘whole is the sum of its parts’. For details see my paper.

David ends:

“With the triumph of the Invisible Hand, the Impartial Spectator promptly receded into the outer twilight of the economists' discourse. It's a measure of the extent to which their field dominates a certain kind of public conversation that today the term sounds quite foreign to our ears.”

‘With the triumph of the Invisible Hand…’. Er, what triumph, when, and in which century? It certainly did not triumph when he was alive; and after he died it was hardly mentioned (once by Dugald Stewart, his first biographer, I believe, but the reference is not to hand – I am France and my library is in Edinburgh).

Professor Warren Samuels, while presenting his paper on the ‘Use of the Concept of the Invisible Hand and the Function it Serves’, he reported that he could not find a single reference to the ‘invisible hand’ among economists in the 19th century (he invited the audience to send him any they knew about). This suggests a remarkable ‘triumph for the invisible hand’ in that nobody has noticed it!

Now, David Warsh attended this session and he listened attentively to what Professor Samuels had to say, including the gist of his paper that the ‘invisible hand’ in its modern form (but not Smith’s) was in effect ‘re-invented’ in the mid-20th century by neoclassical economists, mainly influential in Chicago, and spread rapidly in textbooks all over the world, and acts as a ‘balm’, and even as a semi-blessing of general equilibrium theory.

The mid-20th century is a long time after the loss of influence or prominence of the ‘impartial spectator’, which actually occurred from the early 19th century, though Moral Sentiments remained in print (I have several 19th century editions of it in my library) through to the 21st century.

That ‘the Impartial Spectator promptly receded into the outer twilight of the economists' discourse’ is of no greater significance than the fact that Adam Smith’s Wealth Of Nations also ‘receded into the outer twilight of the economists' discourse’. There is widespread ignorance of Smith’s political economy among modern economists; he is more often quoted than read. At seminars and in private conversation, many participants are astonished to hear even straightforward facts from Smith’s life and books. In fact, it is only a little exaggeration to say that the real world also has ‘receded into the outer twilight of the economists' discourse’.

Incidentally, and just for the record and balance, there were several references in literary English essays and novels to ‘invisible hands’ in the early 19th century, as there were to ‘invisible hands’ in classical times, and in the 16th, 17th, and 18th centuries, many of which Smith almost certainly knew about. Its association with ‘spontaneous order’ is owed to Hayek, in the 1940s; it was not something Smith suggested.

Those interested in reading my paper: ‘Adam Smith’s invisible hand: from metaphor to myth’ should send me an email to gavin [at] negweb {dot} com and I shall send an electronic copy; any comments, positive or negative, are welcome (including any additional references to uses of ‘invisible hand’ metaphor beside the ones in the paper).

Against Stupidity ....

Jonathan Ivinson in Guardian Unlimited asks: ‘How will Gordon Brown be judged as chancellor of the exchequer?'

He has read Adam Smith (as a quotation or from the Wealth Of Nations) and presents the obvious conclusion without thinking about it too carefully:

“The chancellor's aspiration to create a "modern tax system based on principle" is difficult to reconcile with the reality of the tax system today. Adam Smith's concept of the principle of equity in taxation stated that the burden of taxation should fall on those with the greatest ability to pay, perhaps a useful starting point for a Labour chancellor.”

CommentJonathan confuses burden with a high rate of taxation on the rich, who can afford to pay more, and should on equity grounds do so. I think this catches some ofthe spirit of Smith’s Book V of Wealth Of Nations.

However, that is where Jonathan goes wrong. The purpose of taxation is to pay for the necessary expenditures on government in defence, public works and institutions, education (and in Smith’s mind, the treatment of ‘obnoxious diseases’) and the ‘dignity of the sovereign’ (legitimate expenses of government – the Houses of Parliament, embassies, entertainment of foreign dignitaries, and so on). Today there are much wider responsibilities of government, but for the essence of the argument about tax rates we should set that aside.

The purpose of equity in a tax rate debate is not to punish the rich, or to punish the poor (Smith did not fancy taxing wages of the poor, for instance). Hence, the old Labour habits of 98 per cent income tax rates were not a sign of labour’s virility in the socialist canon of punitive taxation, because the real test of an appropriate tax is its contribution to the total tax requirement of the democratically elected government. If a 98 per cent, or any other percentage, raises less tax revenue than some other rate, its equity object is defeated.

Dictators who killed kulaks in early Soviet Russia, or who expelled Asians from Uganda, or who have driven out European farmers in Zimbabwe, do not understand wealth-creation. Their people reap what the dictators don't sow; often famine, always avoidable disasters (but the dictators never go hungry). Those in Britain who want to stop East Europeans or anybody else coming here to work, do not understand wealth creation.

Old labour socialists do not understand wealth creation. Jonathan Ivinson appears not to understand wealth creation either. What he proposes is to focus on the rate and not the tax take from each level of the income distribution. The higher the tax rate on rich and poor alike, the lower the pace at which people work and people create work. That is true for a multi-millionaire and a single mum contemplating a part-time job.

If the risk of a business failure and a 98 per cent tax rate operate, the millionaire lives off his or her income (elected governments do not last forever). If a single mum is hardly better off working than living on benefit, she prefers not to do so. If a skilled plumber cannot make extra work, net of tax, compensate for the effort, he doesn’t seek extra work, which leaves plumbing work not done.

Those who advocate raising the tax rates do not understand how to create wealth in modern Britain, and certainly don’t appreciate how people, themselves included, respond to incentives, and as importantly, to disincentives.

It is an empirical question. Does a 60 to 98 per cent tax band raise as much money for government expenditure as much as a 10-40 per cent tax band? Would a 15 per cent rate raise sufficient to pay for expenditures? In which tax regimes does wealth creation thrive and in which does it wither?

If more tax revenue is generated from lower rates of taxation, with the more affluent paying a greater proportion that the very poor and disadvantaged (who should not pay anything), this would meet the requirements of a Smithian tax policy. Of course, we have to look at his recommendations for expenditure too, but that’s another debate.

Adam Smith understood this and so should the people who pillage Wealth Of Nations in search of comfort for their programmes of non-wealth creation.

But as Schiller said: ‘against stupidity, even the gods battle in vain.’

A Discourse Between Two Futures

It is tempting to dismiss your blog post as nonsense or as a glancing apology for a naive libertarianism.

Since no one is advocating state bureaucratic socialism with central planning, so far as I can tell, your tilt at windmills is at least as silly as (Richard) Smith's.

Like Marx, (Adam) Smith has never been implemented as written--that moralism/public good piece always seems to be forgotten! But there aren't even many advocates for an accurate Marx, so far as I can tell.

I think rather than looking backward in your critique to failed nostrums, you would be wise to look forward to impending crises.

Thank you for your comments. We are coming at Richard Smith’s idealistic contribution from different directions, and thereby talking past each other.

My disagreement with Richard’s post was mainly in regards to his mythical Adam Smith (‘number 1’ mentality, etc.,) and only en passant in regard to his prescriptions for achieving unanimity between millions, billions even, on what should be done about his catastrophe vision of the immediate future.

In so far as ‘socialism’ was an intended component of the future response, I considered him to be naïve, and for added measure, to be utopian and unhistorical, given the experience of ‘socialist’ governments of the 19th century (all versions; none of them pleasant, or even workable).

To Richard’s naïve error of Smith’s mythical ‘number 1’ mentality (see his Theory of Moral Sentiments’), your question: ‘How will unintended consequences and externalities get solved by (Adam) Smith's invisible hand?’ adds a further myth about Adam Smith’s use of the famous metaphor, which was made famous not by his use of it only three times in a million words, or by readers of the first through ten or twelve editions (it was not mentioned at all in the 19th century), but by neoclassical economists, originally based in Chicago University, who re-discovered the metaphor and used it to ‘bless’, or give credibility to their general equilibrium theories in the mid-20th century. From thence it became a universal and obligatory, but not Smithian idea, that had nothing to do with Smith’s use of it.

I have spent many contributions here trying to expose the misuse of the so-called invisible hand among the economics discipline. You may scroll through the Lost Legacy archives for further details.

So the answer to your question of ‘how will unintended consequences and externalities get solved by (Adam) Smith's invisible hand’ quite simply is: a metaphor will not solve anything; it does not have a relevance in the real world; it does not exist, not does it represent anything that does exist.

It is a rhetorical metaphor used by Smith once in ‘Moral Sentiments’ and once in ‘Wealth Of Nations’ after he had explained the consequence of feudal warlords having to feed their retainers, serfs and slaves at least to subsistence level, and the response of merchants to their risk aversion to sending their capitals abroad compared to applying them locally where they could watch over them.

His clear explanations of what happened and why on each occasion did not require ‘an invisible hand’ or a ‘black box’ process for the consequence to occur. He had no ‘theory’ or ‘concept’ or need for ‘providence’ to be present to effect the consequences he alluded to.

It would, therefore be in vain for anybody to await ‘an invisible hand’ solution to future problems that arise from ‘climate change’, if such is about to happen outside in the real world and not just in computer modelling. If climate change occurs, as well it might at some time, any time, in the future, as it has in the past (Antarctica was once a hot rain forest; Europe, including Scotland, where I live, was under 2-3 miles of ice, etc.,), humans will have to make pretty severe changes to their modes of subsistence.

In the last ice age, 20,000 years ago, humans either walked south with whatever they could carry from their primitive stone technologies, or perished where they stayed or en route towards the sunnier climes (when competing with 'stay-at-homes' who had not gone further south).

Somehow I believe the changes required this next time would be better responded to by modern economies and highly developed technology than by reverting to nature, undoing knowledge and technology, and expecting universal harmony from well-meaning ideas.

I have no idea if this will be enough – I will not be alive – and from my knowledge of the history of humanity, I am not optimistic of the outcome brought about by the necessities of such changes (consider not just left, right politics, but also religious fundamentalism among Judaeo-Christian sects and Islam's sects as in Gaza this week, plus the array of the other ‘isms’, plus whatever lunacies arise at such a time).

Meanwhile, Lost Legacy is about correcting the mythologies about Adam Smith’s life and work. Richard Smith and your good self stated false notions about Adam Smith. I have attempted to correct them.

Thank you for your comments; they made me think over what you said.As to the future: que sera sera.

Friday, June 15, 2007

Adam Smith Understood in Wayne State

I came across an article, ‘Remembering the Classics’ on the Everyday Economist Blog after lunch (a la France) today and it was a great pleasure to read it. It is close to being a clear understanding of the role and context of Adam Smith’s contributions to moral philosophy and political economy as I have seen for many months.

I know little about the Everyday Economist Blog, so cannot elucidate on the background of its author (maybe I should know, but my memory is not as good as it was). He is Josh Hendrickson, who teaches Principles of Macroeconomics and Principles of Microeconomics at Wayne State University where he is also working on his Ph.D. On this evidence, economics at Wayne State University is in good hands.

Here are extracts (but you must read the article yourself to appreciate its importance):

“Adam Smith’s Wealth of Nations derided mercantilism as confusing wealth as a finite stock of gold that could be earned only through competition and at the expense of others rather than something that could be mutually obtained through independence and specialization. In essence, it was a belief in a zero sum game. Mercantilists blindly sought to maintain trade surpluses for the purposes of accumulating an ever-increasing stock of gold often using cruel methods of ensuring their success.

Colonialism and slavery served as prime examples of this mercantilist mindset and were equally criticized by Smith and his contemporaries (somewhat ironically, they often erroneously considered as creations of capitalism because they remained as remnants of mercantilist philosophy for generations after Smith). Classical economists viewed slavery as inefficient because it deterred the voluntary acquisition of human capital and innovation. Further, few economists, let alone students, seem to recall Smith’s view of the British policy of colonialism in America and beyond as mercantilist nonsense, despite the fact that his book was written in the same year as the Declaration of Independence.’

CommentWith so many positives in the article, this is not the time for quibbles. Josh Hendrickson rightly connects Adam Smith to his critique of mercantile political economy (which many economists know as a set of facts, but they often fail to understand its significance, an inconvenience from not being political economists).

Wealth Of Nations is a report of Smith’s historical inquiry into the new phenomenon of the evident (from looking outside his window) rising national output, and the increasing production of the ‘necessaries, conveniences and amusements of life’ in Britain. Slowly and gradually there was an increasing per capita consumption by a minute per cent per year, and by several more percent per generation. This unexplained trend had been underway since the 15th century and had been preceded by a millennia of barbaric war-lord- and feudal-managed agriculture, with an unchanging, except when worsening, subsistence level in the lives of peasants, serfs and slaves, that followed the fall of Rome.

This was the main event in Smith’s historical viewpoint (he writes two chapters in Wealth Of Nations on it and it is never far away from themes in the rest of his book. In short, Wealth Of Nations was never a textbook on economics; it was an account of the transition from barbarism towards a commercial society (and note, please note, it included nothing about what we know as a modern capitalist economy from the mid-19th century, decades after Smith’s death, and nothing about the so-called ‘industrial revolution’ which changed modern society fundamentally).

Adam Smith’s focus was on his critique of mercantile political economy, which while a feature of it can with justice be ascribed the mercantile error of gold bullion stocks being a measure of ‘wealth’, its more important consequence was the increasing state power, mercantile inspired jealousy of trade, covetous rivalry of rich and richer neighbours, a proclivity for trivial wars against rivals, and their distructive rapine, and thef oundation of colonies based on seapower.

All these phenomenon disturbed the natural progression of domestic agricultural improvement, expanding manufacturing from the division of labour and extension of markets, foreign trade of consumption and the carriage trade. Mercantile political economy so disturbed the natural course of development, caused by a thousand years of post-Roman disruption, that the heavy on-costs of wars, colonialism, waste, prodigality, and regimes of regulation and monopolies, were far more likely to be disastrous for reaping the full benefits of commercial society, than legislators realised.

Smith regarded the American colonies as an enormous policy mistake because they drained scarce capital from Britain for a spurious monopoly of trade by shopkeepers, to the real detriment of domestic capital growth. The ‘loss’ of them was a blessing in disguise. Too bad the colonial error continued in the 19th and 20th centuries!

Wealth Of Nations would be called today a ‘wake-up call’. Unfortunately, Smith was not heeded, except on the fringes, and mercantile political economy continued through the following two hundred years. Its main disuptive features continue today (wars, protectionism, monopolies, jealousy of trade, obsession with trade balances, barriers to natural liberty, nationalism, and religious hostility to other religions and to secular freedoms). None of these variables appear in neoclassical equations of general equillibrium.

However, I believe that Everyday Economist is on the right track about Adam Smith. So much so, that I shall not comment on this sentence in his article: ‘It is nearly impossible to appreciate Smith’s concept of the “invisible hand” without understanding the circumstances in which he was writing.’

Regular readers will know why this, for me, is a Cromwellian ‘self-denying ordinance’ on a massive scale.

Thursday, June 14, 2007

A World Plan for Catastrophe Called Socialism

Climate change is fast becoming a new ‘religion’ of the doom variety (its sister is of the ‘hope variety’). The ‘fin de siecle’ mood is running early this century with its message of impending doom by its end, mixed with new hope of the socialist left for a revival of their failed ambitions to rule the world.

This crossed my desk this afternoon from ‘Space of Hope: a collective blog for the world in common network’ entitled ‘Ecosocialism or bust?’, which is taken from Ian Angus's “Climate and Capitalism blog”, and in turn taken from Richard A. Smith's piece (extracted from the left-green journal, Capitalism, Nature, Socialism).

Richard A. Smith leads off with:

‘In Adam Smith's view, which is still the operable maxim of modern capitalists and neoliberal economists, we should all just ''Look out for Number 1,'' and the common good will take care of itself. If Smith were right, the common good would have taken care of itself long ago, and we wouldn't be facing catastrophe. After centuries of Smithian economics, the common good needs our immediate and concentrated attention.’

CommentIt is tempting to dismiss this nonsense as such. But I find that increasing numbers of otherwise senssible adults are indulging themselves with plans and prescriptions to ‘save’ the planet in the most extreme and dangerous manner, from both Left and Right and Moderate in-betweens. I don’t know which is worse, their naivete or their seriousness.

Here’s an example of their naivete:

“Corporations can't make such decisions in the best interests of society or the future, because their legal responsibility is to their private owners. The only way such decisions can be scientifically rational and socially responsible is when everyone who is affected participates in decision-making.”

“And time is running out. We don't have 20 or 30 years to wait for We don't have 20 or 30 years to wait for Ford and GM to figure out how they can make a buck on electric cars. We don't have 60 or 70 years to wait while investors in coal-powered power plants milk the last profits out of those sunk investments before they consider an alternative.”

The notion of “everyone who is affected participates in decision-making” is surely ridiculous. Just listen to radio and tv phone-in programmes and sample the ideas of ‘everyone who is affected’. But there is no way 6 billion people will ‘participate in decision-making’, and it certainly will not be ‘scientifically rational and socially responsible’, whatever horror that means.

Unable, apparently, to wait ‘20 or 30 years’, let alone ‘60 or 70 years’, the time spans available being much less suggest finding agreement among ‘everybody’ in some centralised system will soon collapse in a struggle for power by groups with even shorter fuses for ‘something must be done’. And these groups need not be of a mind to be Left socialist – they may very well be Right socialist. And then what? Something like Gaza this week – two groups ostensibly of a similar mind, killing each other to command a collapsing economy?

Starting from the false premiss that Adam Smith said ‘we should all just ''Look out for Number 1,'' and the common good will take care of itself’, it seems that Richard A. Smith recipe to deal with the problem we apparently face in less than 70 years, is to return to the failed nostrums of ‘socialist rational planning’, which in one sense may be helpful at reducing production drastically – it is a common feature of all socialist planning that it is so inefficient that it empties the shops of everything anybody wants to buy.

Smith never articulated any such ‘Number 1’ mentality. It’s a fiction of the imagination of Richard Smith and, I must say also, a fiction massaged into silly ideas about laissez-faire corporate capitalism, about as far as one can get from Adam Smith’s political economy.

An Everyday Incident in a Young Boy's Life

Tim Schilling writes a quite moving piece on ‘Barney and the Theory of Moral Sentiments’ in Federal Reserve Bank of Chicago (here), and I return to regular Blogging with a comment :

‘Our actions are governed in part, by a need for acceptance by our companions and society’, and this is brought about by a learning process from childhood and from when we enter the company of others, such as at nursery, school and eventually the wider world, or what Smith called the ‘great school of self-command.’

That a young boy was not willing to share his ‘goodies’ with an adult indicates that the socialisation process was not yet completed, a not uncommon feature in any child’s behaviour.

The impartial spectator is the ‘judge within the breast’ and is not heard by the other person ‘outside’, so to speak. The impartial spectator in this case may not be ‘fully formed’ and may indeed be operating within the boy and without the outside person knowing of it.

Tim does not report if the boy was comfortable with his decision not to share, or if he justified his actions, but he had no way of knowing what he was thinking. Acts of selfishness that we all have committedmany critics speak of the "impartial spectator over our lives, including memorable one’s as a child, occasionally surface in memory, if only to embarrass us.

Tim says that ‘many critics speak of the "impartial spectator‘" as the anti-thesis of the "invisible hand" of the marketplace’.

As he is discussing Adam Smith’s two books, he should explain what is meant by ‘the invisible hand of the market place’ in the context of anything Adam Smith wrote about? I know of no reference by Smith to ‘an invisible hand’ in relation to the ‘market place’.

That is a construction placed on the metaphor (which he used only three times in all of his writings) and on no occasion was he referring to the market place. Of course, I speak of the Adam Smith born in Kirkcaldy and not the ‘Adam Smith’ supposedly ‘alive and well and living in Chicago’ (according to George Stigler).

On these grounds, Smith’s impartial spectator (the nature of which he detailed in Moral Sentiments) and his use of a well-known (at least to educated men like Adam Smith in the 18th century: Homer, Augustine, Shakespeare, Glanvill, Defoe, Rollin, Bonnet, Robinet, Voltaire, etc.,) literary metaphor of ‘an invisible hand’ have nothing in common or in ‘antithesis’ to each other whatsoever. That is a wholly false trail to set out upon, and compounds the errors in Tim's formulation of the problem he discusses.

The young boy’s actions are explained by his youth (an unfinished development of his conscience/guidance of his impartial spectator), which, as an outsider, Tim cannot ‘listen’ to – he could have overridden its advice, as many do. No outsider can decide if another person’s impartial spectator is a ‘true’ spectator, whatever judgement is involved in such an odd construction. Neither has the ‘impartial spectator’ concept anything to do with an "invisible hand", which incidentally does not look ‘after the best interest of BOTH parties’ (at least, the “Kirkcaldy” Adam Smith’s use of the metaphor did not do so).

I recommend readers to read Tim Schilling's interesting observation in the context of the impartial spectator; it is a great educator in that it provokes you to think over Smith's meaning.

Monday, June 11, 2007

Morning After the Day Before

I'm waiting for my taxi to Dulles and reflecting on the HES Annual Conference.

Met two participants at breakfast whom I had seen during the 3 days. I remarked about the general pleasantness of the HES economic history participants compared to the general adversarial conduct during conferences of economists. Professor Young remarked that HES people didn't do adversarial. Amos added that in European History of Economics conferences, it was much more adversarial, putting it down to the participants being more economists than historians, which means HES are more like historians than econoimists.

The people I met were largely less neoclassical and more heterodox than I am used to meeting. There is also, as I have remarked earlier, more participants who study religious influences on the hisotry of economics. This is also Virginia and I keep meeeting taxi drivers and others who say they are 'creationists' and don't believe in evolution. I can never imagine anybody in Scotland discussing creationism - the belief that the world ewas createrd iun only 6,000 years ago.

Adam Smith's friend, James Hutton, was one of the first geologists(and improving farmer) to assert that the earth was many hundreds of thousands of years older than 6,000 year, which he concluded from his study of the rock formations of Scotland. He used to walk with Smith up the remnants of the volcano at Holyrood Park, just at the bottom of the Royal Mile between the Castle and Holyrood Palace. Today the eseremnants are dated at 5 million years. Hutton was one of Smith;s executors (who burnt his manuscripts on his death-bed instructions, though they tried to dither about doing it, until Smith got too agitated for them to continue the deception).

My Last Day of HES 2007 Conference

I’m used to the routine by now: 'good morning coffee', fruit and bun; sit anywhere with or without company; if with, short introductions and chat about general interests; if without, look through the day’s agenda. I choose the sessions with Smith in them. Fortunately for my interests there’s a ‘Smith contribution’ in at least one session per time slot.

There’s also a fair number of sessions on ‘religion and the history of economics’ too. In conversations about mutual interests, I seem to meet many people with interests in religion – not all of whom have a religious affiliation – and with whom I have interesting exchanges, especially those with interests in Smith. As a conversation starter, I assert that Smith was not ‘religious’, based on a close reading of Smith’s biographical trail and Moral Sentiments. Like with my recent correspondence with Andy Denis (City University), the reception to this notion is mixed, but negative. Some seems to consider me ‘wholly wrong’; a few ask for details. But all are polite in their dissent. Only one agrees with me. It was ever thus.

First up is session 5E: ‘Mandeville, Hume, and Smith’. Amos Wiztum, London Metropolitan University, delivers a stunning lecture on ‘Interdependence and Equilibrium’ – mainly about General Equilibrium and Smithian interdependence, built around a ‘72-slide presentation’ - combining wit, total command of his subject, and excellence in equal balanced measure. I found him informative and I want to hear more, but time squeezes it out. I discuss briefly with Amos some differences and clarifications, and I shall follow up on his ideas over the next few weeks (including reading his paper – no copies available at the session or on line).

Maria Paganelli (Chair and discussant) handles her role well, with Eric Schliesser (Discussant), both providing excellent-value comments. Eric is an accomplished teacher, critical where he finds something lacking, but at all times he delivers his views professionally without crossing the thin line that causes resentment. He is a formidable professor, on top form. I should imagine his students and colleagues respect and like him.

Then it’s my session, chaired by Paul Oslington, a young professor (compared to me)from Australia; another accomplished performer, who specialises in economics and theology too. He critiques my paper, which I note for the rewrite (including some unclear points and their ‘relevance’), plus an important journal article from 2000 missed by me (near knock-out blow - quelle horreur!- but he was polite about it). Only one question from the listeners, though several speak to me with enthusiasm afterwards. I feel that I got off lightly because I could see certain flaws a I spoke, but nothing that cannot be put right ('rewrite here I come, via Edinburgh University Library to check the JPE article'). That is the power of academic discourse; it keeps one’s feet on the ground and out of the clouds.

A Plenary session gives the floor to Tiago Mata, a recent PhD graduate, who discusses ‘Dissenting Identities in 1960’s Economics’. I knew several of the people in the UK who ‘led’ an effort for ‘radical economics’ from Cambridge. John Vaizey, the head of department at the time, brought Joan Robinson to the Brunel (West London) campus for an Honorary Doctorate, the first she had received in the UK; others were Eatwell, Kaldor, and Shackle (also Amartya Sen: Vaizey was well connected), plus copies of Eatwell’s ‘Ricardian’ introductory textbook and Sraffa's obscure, at least to me, 'Production of Commodities by Means of Commodities'…

Much of what Tiago Mata uncovered in the US, explained what was going on around me during that period when I started teaching (Vietnam, students boycotting exams, interruptions in lectures, including mine in statistics(!!), etc.,). Radical economists in the USA were heavy into ‘activism’ in the 1960s, but as someone suggested from the floor, the trigger in the 60s and 70s may have been the draft, which in its absence today there has not been any similar radicalisation of young students over Iraq, an equally controversial war. This made Vietnam personal. Everybody in Iraq and Afghanistan is a volunteer.

Inevitably, the 1960s student radical ‘activists’ soon split off into separate factions. I was minded of Adam Smith’s dictum: philosophers should ‘do nothing’ except observe and understand the world, in contrast with Marx’s call for philosophers to ‘change’ it. Smith’s approach is better for all concerned, as many attempts to ‘change the world’ only make it worse. Meanwhile, at the time, I went off into research and teaching into defence economics…

Two more plenary meetings took place; one inducting A. M. C. Waterman and Donald Winch as ‘Distinguished Fellows’ of HEC. From the presentations by colleagues who knew them well, I could see why they were awarded their distinctions. Warren Samuels was one of the speakers, and he explained with his masterly style why they had been chosen, with telling anecdotes about them and cameo expositions of their work. Profs Waterman and Winch, demonstrated by their lives and demeanour, the modesty that is common among the truly talented, and which I have found when in the presence of the three Nobel Prize winners I have met. Top academics of the other kind - arrogant, loud, gossipy and rude to colleagues and students alike – are very rare inductees into the uppermost perches in the academic roost. Incidentally, Professor Waterman qualified as an Anglican priest before taking up economics.

After a second corridor discussion with Amos Wiztum on Smith, I arrived minutes late at a ‘Roundtable Discussion’ on editing and writing for professional journals. Warren Samuels was speaking here too, and was well worth listening too. He was followed by others (editors of journals and referees) and there was a heavy presence in the audience of graduate students, no doubt anxiously placing their feet on their ladders to tenure. The advice from the platform was practical, sound, and born of years of editing journals. I trust the young lions will take note.

The last session I attended was the HES Presidential Address by Bradley Bateman, on ‘Reflections on the Secularisation of American Economics’. This I really enjoyed. A summary would not do it justice. I was most impressed, to put it mildly. He made a strong impression on me in his historical analysis of the close role of protestant Christians in the late 19th and early 20th centuries on the development of US economics, and the apparent, though misleading, absence of religious influence from the 1950s in the neoclassical paradigm.

After the Presidential Address I attended the last reception, to be followed by the course dinner. I spoke to several attendees before the dinner and then slipped away quietly before it started, after thanking them for their kindness and company. I am not too good at ‘socialising’ with relative strangers (a personal defect I confess); though be clear, the people I met during the three days of HES were very welcoming. This was unlike my experience of the Columbia University conference last August, where my attempts to speak with attendees mainly ended in disappointing failure, with a few exceptions (e.g., Chris Berry, Pierre Force and Sam Fleischacker).

David Levy and Sandra Peart were at the centre of most things during the conference. Sandra, having organised and managed two back-to-back conferences this week was tireless everywhere, all day. I must record my appreciation of the outstanding energy and cheerfulness of Sandra during what must have been a most exhausting and anxious week, plus the many weeks earlier she spent arranging everything.

She spoke, in reference to younger participants, on one occasion, suggesting, inter alia, that they should remember that they were in a community of scholars, the influence of which could help them in their careers. Berating editors and referees over rejected papers was not a ‘good idea’. File the referees report for a while and then go back to it. This made me think of Martin Luther’s thesis that he nailed on the church door; not a good example for a young historian, though the urge to do so is understandable. You have to earn the right to do what Luther did, and that right is bestowed by your present peers.

I am not surprised, now that I have observed her work rate, that Sandra has neglected her Blog (‘Adam Smith lives!’). When she recovers, I hope she revitalises her Blog, though now that she is President of HES for 2007-8 I doubt that she will slow down.

There is online access to the course papers here (and follow the links).

Next year’s HES conference is in Toronto. I would like to attend it on the basis of what I experienced at this year’s in Fairfax Virginia.